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Throwing light on Supachai's memo


MARCH 23, 1999 -- Thanong Khanthong and Vatchara Charoonsantikul examine specific recommendations in a memo from Dr Supachai Panitchpakdi, the deputy prime minister and commerce minister.

Budget disbursement

ALARMED by the sluggish process of fiscal spending, Dr Supachai Panitchpakdi, the deputy prime minister and commerce minister, has attempted to stimulate the bureaucracy. The current fiscal year is due to end on Sept 30, 1999, and the government agencies will only be able to disburse less than one-third of the Bt825 billion budget. Supachai would like the target for fiscal disbursement to be set at 60 per cent now rather than 30 per cent. Only civil servants' salaries are likely to be received on time, while all other projects are lagging behind schedule. The delay in disbursement is doing harm to the economy at a time when it needs fresh funds to help jump-start domestic demand.

By law, the Budget Bureau is responsible for budget disbursement. Since it is an agency attached to the Office of the Prime Minister, there have not been definite agreements on who should actually be responsible for overseeing an effective disbursement process.

On foreign exchange rate policy.

Supachai would not spell out clearly how he would like the baht's exchange rate to go, but he believes that a weaker baht would not only boost exports but would also bolster the service account. At present, Thailand is earning Bt240 billion in net foreign exchange a year from tourism. A weaker baht would subsequently make Thailand even more attractive as a preferred tourist destination in the region. It has been found that every 0.46 per cent jump in exports in baht terms will result in an increase in the country's output by 1 per cent.

However, Finance Minister Tarrin Nimmanahaeminda shares the International Monetary Fund's view that the baht's present level is a result of macroeconomic adjustments, particularly the reversal of the Thai current account into a surplus. Moreover, in the management of the foreign exchange, the government cannot look at the export side alone, but will have to take into account a balance in macroeconomic conditions, from inflation, balance of payments, import capability, to foreign debt service capability.

On the Aug 14 Banking Restructuring Programme

Supachai would like the banking reform package to become mandatory rather than voluntary so that all the banks would be forced to seek tier-1 capital support from the government. His strategy is to tackle the ailing banking system on both the equity and asset side. On the asset side, he would like the government to carve out 10 per cent of the non-performing loans of the banks. This would relieve the banks' NPL burdens, so that their balance sheets can be quickly improved.

Then the authorities must proceed by forcing the banks to take a bite of the tier-1 capital support from the banking reform package. If the programme is not mandatory, the banks will continue to buy time, while downsizing their operations and loan books. The Aug 14th Banking Restructuring Programme is currently voluntary so that banks have to decide whether or not to make use of government funds. Several critics share Supachai's view that the government is not being decisive enough in dealing with the banks. Tarrin's sympathisers said that given that the banks are politcally well-connected, it would not be easy for the government to force this policy upon the big banks.

Secondly, the NPLs might need to be redefined. Supachai views that since creditor banks and debtors have inked settlements, the banks must be allowed to remove those NPLs from their books immediately, instead of having to wait for three months to do so. The authorities would now like companies achieving debt restructuring to start making repayments to the banks for three months so that the loans are considered good again.

Thirdly, Supachai views that the banking authorities' definition of NPLs should be redefined when it comes to a group of companies. At present, the authorities prefer aggressive banking prudence by requiring banks to book NPLs for an entire group of companies if one of the subsidiaries defaults on its debts. Supachai thinks that with the strategic NPLs -- those who have money but choose not to pay back the debts -- this prudence is not realistic. Banks should only book NPLs from companies which default on their repayments, and companies which are still servicing their debts but belong to the same group should not incur NPLs for belonging to the same group.



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